GENWORTH MI CANADA INC.

Transcription

1 Consolidated Financial Statements of GENWORTH MI CANADA INC. Three months and nine months ended September 30, 2010 and 2009

2 Consolidated Balance Sheets (In thousands of dollars) September 30, December 31, Assets Invested assets: Cash and cash equivalents (note 5) $ 165,747 $ 377,512 Short-term securities (note 5) 55, ,527 Bonds and debentures: Held-for-trading (note 5) 37,786 34,485 Available-for-sale (note 5) 3,954,138 3,743,867 Preferred shares (note 5) 67, Government guarantee fund (note 6) 639, ,417 4,921,353 4,986,231 Other: Accrued investment income and other receivables 166,450 28,869 Income taxes recoverable (note 7) 2,813 Salvage and subrogation 33,589 13,646 Deferred policy acquisition costs 152, ,840 Goodwill 11,172 11,172 Intangible assets 14,908 16,307 Premises and equipment 3,116 3,844 Other assets 2,201 3, , ,695 $ 5,308,204 $ 5,209,926 1

3 September 30, December 31, Liabilities and Shareholders' Equity Policy liabilities: Loss reserves $ 213,868 $ 236,181 Unearned premium reserves (note 4) 1,924,237 1,971,396 2,138,105 2,207,577 Other liabilities: Accounts payable and accrued liabilities 91,003 27,811 Due to parent and companies under common control (note 8) Income taxes payable 116,230 Long-term debt (note 12) 272, , ,816 Net future income taxes (note 7) 218, ,218 Accrued benefit liability under employee benefit plans 14,578 11,088 Total liabilities 2,734,714 2,566,699 Shareholders' equity: Share capital (note 13) 1,552,043 1,734,376 Retained earnings 855, ,927 Accumulated other comprehensive income 165,518 96,924 2,573,490 2,643,227 $ 5,308,204 $ 5,209,926 See accompanying notes to consolidated financial statements. On behalf of the Board: Brian Hurley Brian Kelly Director Director 2

4 Consolidated Statements of Income Three months ended Nine months ended September 30, September 30, Gross premiums written $ 168,942 $ 107,029 $ 427,235 $ 260,788 Net premiums written $ 165,823 $ 103,754 $ 417,489 $ 249,883 Net premiums earned (note 4) $ 155,397 $ 153,783 $ 464,648 $ 454,526 Initial impact of change in premium recognition curve (note 4) 100,144 Fees and other income Underwriting revenues 155, , , ,726 Losses on claims and expenses: Losses on claims 47,219 63, , ,415 Sales, underwriting and administrative (note 11) 26,036 23,734 75,436 66,812 Initial impact of change in premium recognition curve on change in deferred policy acquisition costs (note 4) 6,370 73,255 87, , ,597 Net underwriting income 82,167 66, , ,129 Investment income: Interest 45,208 43, , ,483 Dividends 894 1,378 Net realized gains on sale of investments 1,889 1,000 3,699 2,169 Change in unrealized loss on held-for-trading securities 2,170 4,874 3,302 6,344 Equity in earnings of government guarantee fund (note 6) (37) 977 2,941 3,621 General investment expenses (1,085) (1,230) (3,237) (3,638) 49,039 48, , ,979 Interest on long-term debt (note 12) (3,985) (4,028) Interest on related party debt (55) (1,463) Income before income taxes 127, , , ,645 Income taxes (note 7): Current 28,360 32,657 91, ,086 Future 3,904 3,496 12,302 8,287 32,264 36, , ,373 Net income $ 94,957 $ 78,510 $ 264,398 $ 291,272 Earnings per share (note 10): Basic $ 0.84 $ 0.67 $ 2.29 $ 2.56 Diluted See accompanying notes to consolidated financial statements. 3

5 Consolidated Statements of Changes in Shareholders' Equity (In thousands of dollars) Share capital Three months ended Nine months ended September 30, September 30, Share capital, beginning of period $ 1,734,376 $ 1,642,709 $ 1,734,376 $ 1,642,709 Issuance of common shares 91,667 91,667 Repurchase of common shares (note 13) (182,333) (182,333) Share capital, end of period 1,552,043 1,734,376 1,552,043 1,734,376 Retained earnings Retained earnings, beginning of period 929, , , ,299 Net income 94,957 78, , ,272 Dividends (25,762) (77,286) (2,350) Repurchase of common shares (note 13) (143,110) (143,110) Retained earnings, end of period 855, , , ,221 Accumulated other comprehensive income Accumulated other comprehensive income (loss), beginning of period (a) 121,228 54,520 96,924 (14,912) Change in unrealized gains on available-for-sale assets (b) 50,911 48,675 75, ,824 Recognition of realized (gains) losses on available-for-sale assets (c) (6,621) 1,159 (7,361) (2,558) Accumulated other comprehensive income, net of income taxes of $70,636 ( $47,288), end of period 165, , , ,354 Total shareholders' equity $ 2,573,490 $ 2,588,951 $ 2,573,490 $ 2,588,951 (a) Net of income taxes of $53,626 for the quarter ended September 30, 2010 ($43,484 for year-todate) and $24,110 for the quarter ended September 30, 2009 ($5,984 for year-to-date). (b) Net of income taxes of $19,614 for the quarter ended September 30, 2010 ($30,065 for year-todate) and $22,709 for the quarter ended September 30, 2009 ($54,414 for year-to-date). (c) Net of income taxes of $(2,604) for the quarter ended September 30, 2010 ($(2,913) for year-todate) and $469 for the quarter ended September 30, 2009 ($(1,142) for year-to-date). See accompanying notes to consolidated financial statements. 4

6 Consolidated Statements of Comprehensive Income (In thousands of dollars) Three months ended Nine months ended September 30, September 30, Net income $ 94,957 $ 78,510 $ 264,398 $ 291,272 Other comprehensive income 44,290 49,834 68, ,266 Comprehensive income $ 139,247 $ 128,344 $ 332,992 $ 410,538 See accompanying notes to consolidated financial statements. 5

7 Consolidated Statements of Cash Flows (In thousands of dollars) Cash provided by (used in): Three months ended Nine months ended September 30, September 30, Operating activities: Net income $ 94,957 $ 78,510 $ 264,398 $ 291,272 Items not involving cash: Amortization of premiums on investments 729 6,862 7,078 2,673 Amortization of intangible assets 1, ,475 2,272 Depreciation of premises and equipment ,177 1,067 Change in deferred policy acquisition costs (2,269) (616) (5,762) 3,447 Future income taxes 3,904 3,496 12,302 8,287 Net realized gains on sale of investments (1,889) (1,000) (3,699) (2,169) Change in unrealized loss on held-for-trading securities (2,170) (4,874) (3,302) (6,344) 95,223 83, , ,505 Change in non-cash operating items: Government guarantee fund (17,566) (11,926) (47,819) (30,716) Accrued investment income and other receivables (121,244) (16,409) (137,581) (12,949) Current income taxes ,431 (141,202) 52,958 Other assets and subrogation recoverable (8,429) 2,808 (19,127) (4,258) Accounts payable and accrued liabilities 12,197 (14,416) 63,192 (13,723) Due to parent and companies under common control 294 (66,813) (481) (70,248) Loss reserves (14,153) 6,128 (22,313) 64,481 Unearned premium reserves 10,425 (50,028) (47,159) (304,786) Accrued net benefit liability under employee benefit plans 2, ,490 1,608 (40,582) (53,771) (73,333) (17,128) Financing activities: Net proceeds from long-term debt issuance 272,497 Dividends paid (25,762) (77,286) (2,350) Net proceeds from issuance of common shares 91,667 91,667 Repurchase of common shares (325,443) (325,443) (351,205) 91,667 (130,232) 89,317 Investing activities: Purchase of bonds (361,688) (243,568) (917,792) (480,696) Proceeds from sale of bonds 448, , , ,955 Purchase of short-term securities (55,929) 67,127 (55,929) (117,576) Proceeds from sale of short-term securities 253, ,066 Purchase of preferred shares (7,894) (66,696) Proceeds from sale of preferred shares 278 Purchase of intangible assets (388) (2,481) (2,076) (6,910) Purchase of premises and equipment (2) (227) (450) (708) 22,119 (43,051) (8,200) (157,869) Decrease in cash and cash equivalents (369,668) (5,155) (211,765) (85,680) Cash and cash equivalents, beginning of period 535, , , ,654 Cash and cash equivalents, end of period $ 165,747 $ 505,974 $ 165,747 $ 505,974 Supplemental cash flow information: Income taxes paid $ 29,255 $ 20,226 $ 233,675 $ 75,128 Interest paid on related party debt 933 2,206 See accompanying notes to consolidated financial statements. 6

8 Notes to Consolidated Financial Statements 1. Status of the Company: Genworth MI Canada Inc. (the "Company") was incorporated under the Canada Business Corporations Act pursuant to a Certificate of Incorporation dated May 25, The Company is a subsidiary of Brookfield Life Assurance Company Limited ("Brookfield"), and its ultimate parent company is Genworth Financial Inc., a public company listed on the New York Stock Exchange. The indirect subsidiary of Genworth MI Canada Inc., Genworth Financial Mortgage Insurance Company Canada ("Genworth Mortgage Insurance Canada" or "Insurance Subsidiary"), is engaged in mortgage insurance in Canada and is regulated by the Office of the Superintendent of Financial Institutions Canada ("OSFI") as well as financial services regulators in each province. 2. Basis of presentation: These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") using the same accounting policies as were used in the consolidated financial statements for the year ended December 31, The interim consolidated financial statements do not contain all disclosures required by GAAP and, accordingly, should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, Accounting policies - long-term debt: The Company's senior unsecured debentures issued during the year together with associated issuance costs are classified as long-term debt on the consolidated balance sheet and are accounted for at amortized cost using the effective interest method. 7

9 4. Change in estimate of unearned premium reserves: Mortgage insurance premiums are taken into underwriting revenue over the terms of the related policies. The unearned portion of premiums is included in the liability for unearned premium reserves. The rates or formulae under which premiums are earned relate to the loss emergence pattern in each year of coverage as estimated by management based primarily on the past incidence of losses on claims, and are referred to as the "premium recognition curve". The Company performs actuarial studies of its multi-year loss experience on a quarterly basis, which have indicated an acceleration of premium recognition. The impact of the experience update for the three months ended and nine months ended September 30, 2010 was an increase of premiums earned of $11,868 and $35,543, respectively. The cumulative impact of the initial update of the premium recognition curve for the three months and nine months ended September 30, 2009 was $11,495 and $123,690, respectively. 8

10 5. Investments: The fair values of invested assets, excluding the government guaranteed fund, are summarized as follows: September 30, 2010 December 31, 2009 Unrealized % market Unrealized % market Market value Amortized cost gain (loss) value Market value Amortized cost gain (loss) value Cash and cash equivalents: Government treasury bills $ 124,553 $ 124,553 $ 2.9 $ 231,519 $ 231,519 $ 5.3 Bankers' acceptances 14,743 14, ,898 64, Time deposits 11,540 11, ,943 65, Cash 14,911 14, ,152 15, , , , , Available-for-sale securities: Government bonds: Canadian federal 986, ,447 26, ,073,117 1,053,507 19, Canadian provincial 620, ,873 36, , ,647 22, ,606,923 1,544,320 62, ,710,719 1,668,154 42, Corporate bonds: Financial 1,280,983 1,200,622 80, ,420,446 1,370,884 49, Energy 306, ,130 17, , ,195 10, Infrastructure 256, ,307 15, , ,534 6, All other sectors 301, ,582 14, , ,394 9, ,145,488 2,017, , ,032,637 1,957,007 75, Preferred shares: Financial 61,145 60, Industrial 1,427 1, Energy 5,313 5, ,885 66,835 1, Asset backed bonds 257, ,921 8, , ,116 1, ,077,952 3,877, , ,997,817 3,877, , Held-for-trading securities: Financial 37,786 50,000 (12,214) ,485 50,000 (15,515) 0.7 Total securities $ 4,281,485 $ 4,093,464 $ 188, $ 4,409,814 $ 4,305,210 $ 104,

11 5. Investments (continued): The fair value of invested assets, excluding the government guarantee fund, preferred shares, and cash and cash equivalents, is shown by contractual maturity of the security. Yields are based upon fair value. September 30, 2010 December 31, 2009 Fair Yield Fair Yield Terms to maturity value % value % Investment securities issued or guaranteed by Canadian federal government: 1 year or less $ 237, $ 397, years 270, , years 725, , years 264, , Over 10 years 107, , ,606, ,710, Corporate debt: 1 year or less 309, , years 582, , years 547, , years 523, , Over 10 years 477, , ,440, ,321, $ 4,047, $ 4,031, Guarantee fund and Government of Canada Guarantee Agreement: The government guarantee fund reflects the Company's proportionate interest in the assets held in the government guarantee fund established under the Government Guarantee Agreement, including accrued income and net of applicable exit fees. The fair value of the government guarantee fund as at September 30, 2010 is $639,868 (December 31, $576,417). The Company records the results of income from the fund of $20,008 (September 30, $15,639) less exit fees of $17,067 (September 30, $12,018) in equity in earnings of government guarantee fund 10

12 6. Guarantee fund and Government of Canada Guarantee Agreement (continued): The following table summarizes the components of the government guarantee fund: September 30, December 31, Invested assets at fair value (a) $ 774,082 $ 699,207 Accrued contribution and accrued income (b) 24,420 14,700 Accrued exit fee and MICC liability (c) (158,634) (137,490) $ 639,868 $ 576,417 (a) Investments held under the Government Guarantee Agreement including government bonds and bonds unconditionally guaranteed by the Government of Canada and cash; plus (b) The Company's accrued contributions of 10.5% of premiums written on insured mortgages for the quarter ended September 30, 2010 and accrued interest on invested assets; less (c) The cumulative exit fee applicable to the fair value of the Company's proportionate interest in investments held under the Government Guarantee Agreement and accrued contributions, and the Company's liability for the net proportionate interest in guarantee fund of its predecessor the Mortgage Insurance Company of Canada ("MICC"). 11

13 7. Income taxes: Provision for income taxes is comprised of the following: Three months ended Nine months ended September 30, September 30, Provision for income taxes: Current $ 28,360 $ 32,657 $ 91,187 $ 128,086 Future 3,904 3,496 12,302 8,287 $ 32,264 $ 36,153 $ 103,489 $ 136,373 Income taxes related to: Change in unrealized gains on available-forsale securities $ 19,614 $ 22,709 $ 30,065 $ 54,414 Recognition of realized losses (gains) on available for sale securities (2,604) 469 (2,913) (1,142) $ 17,010 $ 23,178 $ 27,152 $ 53,272 Income taxes are payable on the change in unrealized gains or losses reported in the Company's consolidated statement of comprehensive income in the year in which they are incurred, and are included in the income taxes payable balance on the Company's consolidated balance sheet. 12

14 7. Income taxes (continued): Income taxes reflect an effective tax rate that differs from statutory tax rate for the following reasons: Three months ended Nine months ended September 30, September 30, Income before income taxes $ 127,221 $ 114,663 $ 367,887 $ 427,645 Combined basic Canadian federal and provincial income tax rate 30.0% 32.0% 30.0% 32.0% Income tax expense based on statutory rate $ 38,166 $ 36,692 $ 110,366 $ 136,846 Increase (decrease) in income tax expense resulting from: Non-deductible (non-taxable) expenses (342) Effect of decrease in rates on future income taxes (740) (641) (2,132) (1,816) Effect of tax rate adjustment relating to enactment of new legislation 1,144 Adjustment for prior periods (4,820) (76) (4,820) (31) Income tax expense $ 32,264 $ 36,153 $ 103,489 $ 136,373 13

15 7. Income taxes (continued): Future income tax liability is comprised of the following: September 30, December 31, Future income tax assets: Employee post employment benefits $ 3,118 $ 2,881 Policy liabilities 2,780 3,070 Financing costs 1,103 7,001 5,951 Future income tax liabilities: Investments, including unrealized losses (gains) on available-for-sale securities (16,491) (15,221) Guarantee fund reserve (157,123) (144,594) Policy reserves (49,031) (46,929) Capital assets and intangible assets (2,593) (2,425) (225,238) (209,169) Net future income tax liability $ (218,237) $ (203,218) Management reviews the valuation of future income taxes on an ongoing basis to determine if a valuation allowance is necessary. The Company expects to fully utilize the benefits available from existing future income tax assets. No valuation allowance is required as at September 30, 2010 (December 31, nil). The aggregate amount of income taxes paid for the nine months ended September 30, 2010 was $233,675 ( $75,128). 14

16 8. Related party balances and transactions: Following the closing of the Company's IPO on July 7, 2009, the Company and its Insurance Subsidiary entered into a Transition Services Agreement ("TSA") with Genworth Financial Inc., the Company's ultimate parent company. The agreement prescribes that these companies will provide certain services to one another, with most services being terminated if Genworth Financial Inc. ceases to beneficially own more than 50% of the common shares of the Company. The services rendered by Genworth Financial Inc. and affiliated companies consist of information technology, finance, human resources, legal and compliance and other specified services. The services rendered by the Company and the Insurance Subsidiary relate mainly to financial reporting and tax compliance support services. These transactions are in the normal course of business. Accordingly, they are measured at fair value. Balances owing for service transactions are non-interest bearing and are settled on a quarterly basis. The Company incurred net related party charges of $5,986 for the nine months ended September 30, 2010 (September 30, $5,426). The balance owed for related party services at September 30, 2010 is $294 (December 31, $775). 9. Pensions and other post-employment benefits: The expense related to the Company's defined contribution pension plan was $1,967 for the nine months ended September 30, 2010 (September 30, $1,696). The expense related to the Company's defined benefit plan was $792 for the nine months ended September 30, 2010 (September 30, $600). The expense related to the Company's other non-pension post-employment benefits was $574 for the nine months ended September 30, 2010 (September 30, $484). 15

17 10. Earnings per share: Basic and diluted earnings per share have been calculated using the weighted average and dilutive number of shares outstanding during the nine months ended September 30, 2010 of 115,566,811 ( ,606,593) and 116,647,039 ( ,880,445), respectively. The difference between basic and diluted earnings per share is caused by the grant of employee stock options, Restricted Share Units ("RSUs"), Directors' Deferred Share Units ("DSUs") and Performance Share Units ("PSUs"). The effect is computed below: Three months ended Nine months ended September 30, September 30, Basic earnings per share: Net income $ 94,957 $ 78,510 $ 264,398 $ 291,272 Weighted average common shares outstanding 112,550, ,767, ,566, ,606,593 Basic net earnings per common share $ 0.84 $ 0.67 $ 2.29 $ 2.56 Diluted earnings per share: Weighted average common shares outstanding 113,671, ,580, ,647, ,880,445 Diluted net earnings per common share $ 0.84 $ 0.67 $ 2.27 $

18 11. Share-based compensation: During the nine months ended September 30, 2010, the Company granted 181,700 Options, 42,450 RSUs and 4,872 DSUs to its employees and directors. On February 18, 2010, the Company granted 18,000 PSUs to its senior executive employees. The PSUs vest three years from the date of grant provided that certain performance conditions are met by the Company. The performance conditions are based on the Company's earnings per share, net income, contribution margin, underwriting income and investment income. Upon vesting, the PSUs entitle the senior executive employees to receive an amount equal to the fair market value of the Company's shares and may be settled in shares or cash. PSUs granted by the Company are measured at the quoted market value of the Company's shares at the end of each reporting period. These awards are recorded as compensation expense over the PSU vesting period, with a corresponding entry to accrued liability under employee benefit plans based on management's best estimate of the outcome of the performance conditions. PSUs may participate in dividend equivalents at the discretion of the Company's Board of Directors. Dividend equivalents are calculated based on the market value of the Company's shares on the date the dividend equivalents are credited to the PSU account and are recorded as additional compensation expense. 17

19 11. Share-based compensation (continued): The following table summarizes information about these share-based compensation plans: Weighted Weighted Weighted Weighted Weighted average average average average Number average fair value at fair value at fair value at fair value at of stock exercise September 30, Number September 30, Number September 30, Number September 30, options price 2010 of RSUs 2010 of DSUs 2010 of PSUs 2010 Outstanding, as at January 1, ,000 $ $ 5,249 84,406 $ 2,164 3,257 $ 84 $ Granted 181, ,450 1,088 4, , Dividends equivalents granted 2, Forfeited (2,500 (19.00) (17) (4,883) (125) Outstanding, as at September 30, ,200 $ $ 5, ,591 $ 3,194 8,254 $ ,311 $ 470 Weighted average period (in years) over which expense is recognized Outstanding as a percentage of outstanding shares 0.94% 0.12% 0.01% 0.02% The total compensation expense related to stock options, RSUs, DSUs and PSUs for the nine months ended September 30, 2010 is $1,320, $857, $123 and $90 respectively for a total of $2,390 recognized in sales, underwriting and administrative expenses (September 30, stock options, RSUs and DSUs of $376, $194, and $41 respectively for a total of $611). For the three months ended September 30, 2010, the total compensation expense related to stock options, RSUs, DSUs and PSUs is $1,332, $420, $76 and $65 respectively for a total of $1,893 recognized in sales, underwriting and administrative expenses (September 30, stock options, RSUs and DSUs of $376, $194, and $41 respectively for a total of $611). 18

20 12. Long-term debt: On June 29, 2010, the Company completed an offering of $275,000 principal amount of senior unsecured debentures (the "Debentures"). The Debentures were issued for gross proceeds of $274,862 or a price of 99.95, before issuance costs of $2,413. The issuance costs of $2,413 and the discount of $138 will be amortized over the term of the Debentures using the effective interest method. The Debentures bear interest at a fixed annual rate of 5.68% until maturity on June 15, 2020, payable semi-annually commencing on December 15, The Debentures may be redeemed at the option of the issuer, in whole or in part at any time. The fair value of the Debentures as at September 30, 2010 is $287,387. The Company incurred interest expense of $3,985 for the three months ended September 30, 2010 and $4,028 for the nine months ended September 30, 2010, with accrued interest payable of $4,028 as at September 30, Share capital: On July 19, 2010, the Company made an offer ("the Offer") to repurchase up to $325 million of its common shares validly tendered to the Offer. On August 27, 2010, in accordance with the terms of the Offer, the Company repurchased 12,310,606 common shares at a price of $26.40 per common share, representing 10.5% of its public float, for an aggregate of approximately $325 million in cash. Genworth Financial Inc., through its wholly owned subsidiary Brookfield participated in the Offer by making a proportional tender and continues to hold approximately 57.5% of the outstanding common shares of the Company. Upon completion of the Offer, the Company's share capital was reduced by an amount equal to the average carrying value of the repurchased shares for cancellation. The excess of the aggregate purchase price over the average carrying value, together with the incremental aftertax costs associated with the transaction, were recorded as a reduction to retained earnings. 19

21 13. Share capital (continued): Following the completion of the repurchase transaction, the share capital of the Company was as follows: September 30, December 31, Authorized: Unlimited common shares 1 special share Issued: 104,789,394 common shares (December 31, ,100,000) $ 1,552,043 $ 1,734,376 1 special share $ 1,552,043 $ 1,734,376 20